Journal of Investment Compliance

Purpose – The purpose of this paper is to explain a new directive of the European Union adopted by the European Parliament on May 6 that governs, among other things, the amount of capital that banks and other credit institutions are required to hold in respect of credit risk.

Design/methodology/approach – The paper explains the background to the 5 percent retention agreement, outlines provisions of the new Article 122a, explains exemptions to the 5 percent retention, and discusses additional requirements for investing and originating credit institutions.

Findings – The amended Capital Requirements Directive requires investing credit institutions to demonstrate to their regulators that they understand the risks and valuations of their securitization positions, and have detailed performance and monitoring systems in place. Originators and sponsors will also have to comply with significant new disclosure rules, and originators will be required to align their lending criteria for securitized exposures with loans made for their own banking book. Further amendments are in prospect.

Originality/value – The paper presents practical guidance by experienced securities lawyers.